The lie hidden in our economy

The lie hidden in our economy

There was a time when I was no fun at parties.

That was back in 2016, when the Reserve Bank of Australia had just cut rates down to 1.50%.

The next move will be down,’ I would repeatedly waffle.


Simply idiotic.

Not possible. Rates are already at historic lows.

As if.

Yep. Those were the general reactions I’d get. The idea of the RBA doing something it had never done before seemed impossible to many people I encountered. Especially back at the end of 2016.

That was almost three years ago.

And even as recently as late last year — when a handful of economists were adopting my view — some folks I met were still adamant that the RBA wouldn’t cut rates.

Well, what can I say to those people now?

I told you so.

All that fuss over one little number

I was right and the masses were wrong.

As much as I’d love to dance up a storm in my righteousness, that isn’t helpful analysis.

So, let’s break it down.

Why now?

After months of falling gross domestic product, slow house price growth, inflation continuing to miss the target band, and the Australian consumer all but disappearing, what exactly caused the Reserve Bank of Australia to pull the trigger on Tuesday?

For the last couple of months, the RBA has been talking to the market, explaining how it was keeping its eyes on ‘unemployment’ as a reason to change interest rates.

In fact, it pointed this out at the end of its media statement on Tuesday:

Today’s decision to lower the cash rate will help make further inroads into the spare capacity in the economy. It will assist with faster progress in reducing unemployment and achieve more assured progress towards the inflation target.1

It can’t be that simple, can it?

We’re almost a two trillion dollar economy. And a complex one at that.

We send minerals overseas, which in turn affects the value of our dollar. Plus, when the value of iron ore falls, that affects the value of our national income. We have a consumption-based economy. This alone contributes to 55% of our gross domestic product. When this falls, so does our GDP.

Is the RBA trying to tell us that monetary policy is influenced by one tiny number?

Something smells…

When the data is wrong

Let’s wade through the unemployment statistics.

The ones the Reserve Bank of Australia based its decision on.

According to the Australian Bureau of Statistics (ABS), the unemployment rate sits at 5.2%.

Now, to put this in perspective, 5% has been considered ‘full employment’ in the past. This is something the RBA has routinely accepted.

Full employment meant everyone who wanted to work was in fact working.

So with the unemployment rate now sitting only 0.2% higher, cutting interest rates seems a bit dramatic.

I mean, what’s a few basis points above the full employment rate?

Well, the ABS data bears no resemblance to reality.

You see, the ABS considers a person employed if they work one hour a week or more.

And they also consider you ‘employed’ if that one hour of employment is for unpaid work in a family business or on a farm.2

In spite of this being an internationally accepted definition of employment, it’s useless in terms of gauging how many people are truly working.

Worse still, the official definition of ‘employed’ has evolved over decades. However, the Reserve Bank’s measure of employment data has not.

Meaning, the Reserve Bank bases its ‘full employment’ analysis on a statistic that has been tweaked so much it no longer represents full employment.

Perhaps if the RBA used an alternative figure, it would have discovered that the Aussie economy hasn’t been near ‘full employment’ for a very long time.

Roy Morgan — my favourite phoney data detector — has a different methodology when it comes to calculating employment data.

It considers someone unemployed if they have been looking for work. That’s it. No number trickery or political influence.3

As a result of counting actual unemployed people as unemployed, Roy Morgan believes the unemployment rate sits at 10.3%.4

This is double what the RBA, the ABS and our politicians claim the rate is.

Not only that, the closest Roy Morgan got to a ‘full employment’ statistic was around 5.5% back in 2008.

Too little too late

There is clearly a mismatch in unemployment figures.

However, it seems government officials have no interest in believing that.

Instead, we’ve been offered soundbites about how healthy the economy is, based on numbers that don’t match up with reality.

To me, the RBA’s decision to lower interest rates — based on the unemployment figure ‘rising’ to 5.2% — smells bad.

If an interest rate cut were to have any impact, it should have happened last year.

A lower rate won’t magically change the employment data.

It won’t spur consumption.

And it will lower the income savers get from their deposits at the banks.

Worse, the rate cut has come too late, perhaps because it was delayed until after the election. But diving into that theory will have to wait until another day.

The point is, the RBA missed the chance to cut rates at the right time.

The officials were too busy looking at manipulated statistics to realise that the data doesn’t tell the right picture anymore.

The real picture is worse than what you’ve been led to believe.

Until next time,

Shae Russell Signature

Shae Russell,
Editor, The Daily Reckoning Australia